Consumer sector
Maintain neutral: The consumer sector registered a decent 5% year-on-year (y-o-y) core earnings growth in the first quarter of 2019 (1Q19), driven by sturdy private consumption growth and higher retail sales despite weaker consumer sentiment. For the rest of 2019, we maintain our positive view as macro and business conditions remain sound, while favouring companies thriving within the food and beverage (F&B) space. Given that sector valuations remain rich at about 30 times forward price-to-earnings ratio, however, we maintain our “neutral” call. Our top sector pick is QL Resources Bhd with a target price (TP) of RM8.

The consumer sector’s aggregate core net profit was up by 5% y-o-y in 1Q19, led mainly by large-capitalised stocks such as PPB Group Bhd, Nestle (M) Bhd, QL Resources Bhd, Heineken Malaysia Bhd and Carlsberg Brewery Malaysia Bhd. This was offset by weaker earnings reported by companies facing structural industry challenges such as British American Tobacco (Malaysia) Bhd and Hai-O Enterprise Bhd, and particularly MSM Malaysia Bhd which has fallen back into the red. The sector’s earnings expansion came on the back of a corresponding 5% y-o-y increase in aggregate revenue, while average net margin stayed flat. Overall, 1Q19 results for companies under our coverage were satisfactory, aside from specific companies in the retail, F&B and sin sub-sectors showing weaker-than-expected performance. The surprises were Hai-O, MSM, Oceancash Pacific Bhd and British American Tobacco (below expectations), as well as Bonia Corp Bhd.

While the sector’s top-line growth also met our expectations, the results were disconnected from the further decline in the MIER Consumer Sentiment Index to 85.6 points. Moving forward, we expect the low inflation environment and supportive macroeconomic fundamentals to continue spurring local consumption.

As positive prospects for the sector are largely priced in, we maintain our “neutral” call and stay selective on quality names with good growth prospects. Our top pick remains QL Resources for its defensive core businesses and sustainable earnings momentum. For yield plays with a stable business outlook, we flag Heineken and Carlsberg. — Affin Hwang Capital, June 20